Investors almost have to walk around eggshells with emerging markets (EM) these days. With rising global inflation and a stronger dollar amid tighter U.S. Federal Reserve monetary policy, it’s imperative to get downside protection when thinking of opportunities in EM.
Despite the risks, EM do present investors with potential growth opportunities, especially for bargain hunters. EM countries could be at various stages in the economic cycle, giving investors diversified exposure to other parts of the world that may experience upside where other developed countries may be faltering.
Still, investors need to understand the risks when looking at potential EM opportunities.
“Trade tensions, a pandemic, supply-chain snarls, inflation and war have together dealt them serious blows,” the Economist notes. “Over the past three years more than half the population of the emerging world lived in countries where income growth, on a purchasing-power-parity basis, lagged behind that in America—the first such episode since the 1980s.”
Because of these headwinds, growth may not happen in the near term, so patience is also a virtue with EM. When EM are down for the count, this could present an opportune time for investors to pick up value-oriented assets.
“The IMF forecasts that economic output across emerging markets will expand by 3.8% this year and 4.4% in 2023, figures that have been revised down sharply since last year and which fall short of the 5% average annual rate in the decade before covid-19,” the Economist adds. “As the contours of the post-pandemic landscape come into focus, a lost decade—a period of slow growth, recurring financial crises and social unrest—for the world’s poorer countries looks increasingly plausible.”
An EM ETF With Built-In Downside Protection
For built-in protection and the potential for upside in EM growth, investors may want to consider the Simplify Emerging Markets Equity PLUS Downside Convexity ETF (EMGD).
The fund seeks to provide capital appreciation with exposure to emerging equity markets while boosting performance during extreme sell-offs in emerging markets via a systematic options overlay. Getting dynamic exposure via an active management strategy that EMGD employs helps investors stay fluid with respect to emerging markets.
As such, management professionals can get in and out of positions quickly when necessary, as opposed to a passive index. The deployment of the aforementioned options positions adds a layer of hedging, which creates downside convexity in the fund.
This prevents investors from having to take on another asset class in order to hedge against a market sell-off. Investors can simply stay invested in the fund, as it essentially does all the hedging work for them.
“Downside convexity looks to hedge against market moves without diversifying into asset classes like bonds,” the fund’s fact sheet notes.
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